Look at a country’s political culture to get a grip on economic changes

When countries are unable to find solutions to persistent economic problems, it’s usually a symptom of an underlying political problem. Recent events in Brazil and Japan bear this out. Looking at these countries’ problems may lend some insight to our own.

First, take Brazil, where President Fernando Henrique Cardoso is a member of a relatively small political party. In order to get legislation through that nation’s congress, he depends on the support of three other parties, members of which occupy posts in his administration.

This four-party coalition has fallen apart in a fight over who is to be the speaker of each house of congress. Key legislation designed to limit the chronic deficit spending practiced by state and local government has been held up for weeks. As investors lose confidence in Cardoso’s ability to put Brazil’s fiscal house in order, they have cut back investments there.

This has caused the Brazilian real to fall about 12 percent in value compared to the U.S. dollar over the past six months. It has also forced the central bank to keep interest rates at punishingly high levels to keep the real from slipping further. Business investment is weak and economic growth slow compared to Brazil’s dynamic potential.

Japan has been in political and economic crisis for a decade. When Prime Minister Yoshiro Mori bravely announced at the recent World Economic Forum that his government has things under control and that recovery is just around the corner, the audience reacted politely. No one laughed openly, though the hapless prime minister’s predictions sounded suspiciously like whistling in a graveyard.

Japan’s Liberal Democratic Party, of which Mori is a member, has been in power for most of the post-World War II period. Japan enjoyed enviable growth through the late 1980s, but the economy fell into recession as a bubble in stock and real estate prices collapsed at the decade’s end.

Since that time, the government has tried a variety of Keynsian fiscal and monetary tricks to return the economy to growth. Vast public works projects pushed the national debt to record levels. The Bank of Japan has lowered interest rates to near zero. But the economy remains stubbornly mired.

Throughout the decade, successive LDP governments refused to take tough measures to liquidate failed banks and businesses or to reform inefficient economic structures. The LDP, beholden to large contributors in agriculture and commerce, has been unwilling to rock the boat.

In both Brazil and Japan the underlying problem is institutional and cultural. Economists can tell you that it is good for governments to balance their books and for bank regulators to move swiftly to clean things up when banks fail. But they cannot explain why it has been impossible for Brazil to do the first or Japan the second.

We must be careful to avoid gloating. The U.S. Consumer Price Index increased by 400 percent from 1967 to 1982. And over the last three administrations we quintupled our national debt. Our economy has survived these failures remarkably well, but we would have avoided a lot of pain if we had followed more prudent policies.

Why didn’t we? Political scientists have long analyzed something called political culture, the “attitudes, beliefs and rules that guide a nation’s political system.” To outsiders it seems obvious that the problems plaguing Japan and Brazil are fundamentally rooted in those nations’ political cultures. The cumulative 600 percent inflation in the U.S. and the large increases in our national debt from 1982 through 1997 are similarly rooted in American culture.

Unfortunately, few useful insights have emerged. The question of why nations episodically pursue policies that are self-destructive is still terra incognita for most economists.

© 2001 Edward Lotterman
Chanarambie Consulting, Inc.